the reform experiences of the IMF? - 氣候變遷下的永續環境治理：法律與政策的因應模式-氣候變遷減緩與調適措施之財務機制(I)

Wen-chen SHIH National Chengchi University

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For ASLI Secretariat Use Only Date of Presentation

(delete where applicable): Thursday, 26 May 2011

Panel Assigned: E2 Climate Change & Legal Governance

Title: Financial mechanisms for climate change: what lessons can be learned from the reform experiences of the IMF?

Abstract: The “Copenhagen Accord” issued after COP 15 to the UN FCCC, albeit not unanimously adopted, is nevertheless an important decision relating to further development of the climate change regime.

effectiveness of such financial mechanisms, especially their governance structure in ensuring the democratic quality of producing a fair and equitable resources generation and allocation process will determine whether any financial mechanism can achieve its goal of assisting developing countries to implement climate change mitigation and adaptation policies.

International financial mechanisms for development assistance have been in operation since the

establishment of the Bretton Woods institutions —the International Monetary Fund (IMF) and the World Bank Group in 1947. The governance structure of the IMF has been under constant scrutiny for the past five

decades and has finally resulted in a series of governance reforms in the IMF starting in 2008.

Can the reform experiences in the IMF provide valuable input on the design of governance structure of the existing or new financial mechanisms for climate change mitigation and adaptation? This will be the main research question this article seeks to answer.

Key words: financial mechanisms, governance reform, IMF, climate change

I. Introduction

Financial mechanism has always been an important, yet controversial institutional pillar under the international climate change regime. The negotiation leading up to the United Nation Framework Convention on Climate Change (UNFCCC) has already demonstrated the controversies surrounding the design and governance structure of the financial mechanism under the Convention.¹ Article 11 of the UNFCCC requires that the financial mechanism “shall function under the guidance of and be accountable to the Conference of the Parties…”, and “shall have an equitable and balanced representation of all Parties within a transparent system of governance”. When developed country parties (Annex I parties) undertook concrete legal obligations to reduce six types of greenhouse gases (GHGs) under the Kyoto Protocol, the concept of

‘financial mechanism’ broadened and the types of such mechanism became extremely diversified. In the current post-2012 climate change negotiation, financial mechanism again became one of the crucial

negotiation agenda. The “Copenhagen Accord” issued after COP 15 to the UN FCCC, albeit not unanimously adopted, is nevertheless an important decision relating to further development of the climate change regime.

In this 12—paragraph document, there are seven paragraphs that touch upon issues relating to financial resource and financial mechanism. Furthermore, COP 16 to the UNFCCC adopted the so-called “Cancun Agreements”. The Cancun Agreements also lay down various significant provisions on financial mechanisms, including the newly-created Green Climate Fund. This illustrates the importance of financial mechanisms in adopting and implementing policies on climate change mitigation and adaptation. Amongst the mostly debated issues concerning the design of financial mechanism, the governance structure has always been a crucial one. The design and effectiveness of such financial mechanisms, especially their governance structure in ensuring the democratic quality of producing a fair and equitable resources generating and allocation process will determine whether any financial mechanism can achieve its goal of assisting developing countries to implement climate change mitigation and adaptation policies.

Meanwhile, international financial mechanisms for development assistance have been in operation since the establishment of the Bretton Woods institutions —the International Monetary Fund (IMF) and the World Bank Group in 1947. The governance structure of the IMF has been under constant scrutiny for the past five decades and has finally resulted in a series of governance reforms starting in 2008. Can the reform

experiences in the IMF provide valuable lessons on the design of governance structure of the existing or new financial mechanisms for climate change mitigation and adaptation? This will be the main research question this article seeks to answer. This article begins with an introduction on financial mechanisms for climate change, followed by an overview of the IMF governance reformed. With the experiences of the IMF reform in mind, Part IV provide an analysis on how the IMF reform experiences can provide some lessons for the financial mechanism for climate change, with particular focus on the governance structure.

II. Financial mechanism for climate change

1. Definition and functions of financial mechanisms for climate change

Financial mechanism can be defined as: “Method or source through which funding is made available,

1 This refers to the debate and negotiation on whether the then-World Bank operated Global Environmental Facility (GEF) at its pilot phase should be designated as the financial mechanism under the Convention. The ultimate result was to designate the GEF as the ‘interim’ financial mechanism, with the condition that the GEF “should be appropriately restructured and its membership made universal to enable it to fulfil the requirements of Article 11”. UNFCCC, Article 21.3.

such as bank loans, bond or share issue, reserves or savings, sales revenue.”² In the “Glossary of climate change acronyms” from the UNFCCC website, financial mechanism is defined as “Developed country Parties (Annex II Parties) are required to provide financial resources to assist developing country Parties implement the Convention. To facilitate this, the Convention established a financial mechanism to provide funds to developing country Parties. The Parties to the Convention assigned operation of the financial mechanism to the Global Environment Facility (GEF) on an on-going basis, subject to review every four years. The financial mechanism is accountable to the COP.”³ From these two definitions, financial mechanisms for climate change will be defined in this article as follows: “A pre-determined standards and procedures set by an institution through which funding is mobilized and disbursed for the purpose of climate change mitigation and

adaptation.” Noted that, similar terms such as “climate finance”⁴ or “carbon finance”⁵ are also used in the relevant literature.

The main function of the financial mechanisms for climate change is to assist countries to adopt and implement policies for climate change adaptation and mitigation. According to the World Resources Institute, the typical functions of such mechanisms include: oversight, resource mobilization, resource allocation, project cycle management, standard setting, scientific and technical advice, and accountability. The corresponding roles for such mechanisms are illustrated in Table 1.⁶

Table 1: Functions and roles of financial mechanisms for climate change Function Roles

Oversight z Setting policies, program priorities and eligibility criteria Resource

mobilization

z Replenishment of trust fund

z Leveraging of additional sources of funding from Implementing Agencies, private sector

Resource allocation

z Allocation of resources between multiple focal areas (e.g. mitigation, adaptation, forestry)

z Prioritization between eligible recipients Project cycle

management

z Preparation and approval of projects

z Financial management of loan and grant agreements Standard setting z Development and approval of performance metrics

z Development and approval of environmental and social safeguards Scientific and z Advice on appropriate policies and best available technologies

2 “Method or source through which funding is made available, such as bank loans, bond or share issue, reserves or savings, sales revenue.” Available from: http://www.businessdictionary.com/definition/financial-mechanism.html (last visited: 2011/5/21).

3 “Developed country Parties (Annex II Parties) are required to provide financial resources to assist developing country Parties implement the Convention. To facilitate this, the Convention established a financial mechanism to provide funds to developing country Parties. The Parties to the Convention assigned operation of the financial mechanism to the Global Environment Facility (GEF) on an on-going basis, subject to review every four years. The financial mechanism is accountable to the COP.” From the Glossary of climate change acronyms, available from: http://unfccc.int/essential_background/glossary/items/3666.php#F (last visited: 2011/5/21).

4 For example, Steward, R.B., Kingsbury, B. & Rudyk, B., 2009, Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development, NYU Press.

5 This term is used by the World Bank Group, for example, its “Carbon Finance Unit”:

http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ENVIRONMENT/EXTCARBONFINANCE/0,,menuPK:4125909~page PK:64168427~piPK:64168435~theSitePK:4125853,00.html (last visited: 2011/5/21)

6 Ballesteros, A. et al, November 2009, Power, responsibility, and accountability: re-thinking the legitimacy of institutions for climate finance, figure 1 at p.7.

technical advice z Advice on scientific trends ad risk assessment

Accountability z Monitoring and evaluation of project and portfolio performance z Review and inspection of problematic projects

From: Ballesteros, A. et al Five out of the seven functions of the financial mechanisms for climate change relate to the governance of the mechanisms. This clearly illustrates the importance of institutional design and governance structure of any financial mechanism for climate change.

2. Different types of climate change financial mechanisms by different yardsticks

There are a variety of financial mechanisms for climate change. Different types of financial mechanisms for climate change can be categorised by using different yardsticks such as the purpose of the mechanisms, the scale of the mechanisms, sources of funding, and the types of activities funded by the mechanisms. The

following will briefly introduce the broad range of financial mechanisms for climate change by using these four different yardsticks.

2.1 purpose of the financial mechanisms

Depending on the purpose of setting up such a mechanism, financial mechanisms for climate change can be categorised as: financial mechanisms for climate change adaptation, for climate change adaptation, and for both purposes. The Emissions Trading Scheme of the European Union (EU ETS) is a type of financial

mechanism for mitigation, as the main purpose of the scheme is to reduce the emissions of GHGs within the EU.⁷ Under the international climate change regime, the Adaptation Fund set up under the Kyoto Protocol at its third meetings of the parties⁸ is a financial mechanism for climate change adaptation. The GEF mainly funded projects for mitigation purposes, although adaptation projects are funded as well from the “Least Developed Countries Fund” and the “Special Climate Change Fund”, both of which are established at COP 7 of the UNFCCC and are administered by the GEF. At the same COP, on the other hand, Parties to the

UNFCCC also instructed the GEF to support pilot and demonstration projects for certain adaptation programmes.⁹

2.2 scale

Depending on the scale or platform where a financial mechanism operates, there are international/multilateral, regional, bilateral and unilateral financial mechanisms for climate change. For example, all of the financial mechanisms under the international climate change regime are international/multilateral financial mechanisms. The EU ETS, as well as certain financial mechanisms supported or administered by regional development banks (e.g. the Asian Development Bank operates three

7 However, the revised EU ETS will become a type of financial mechanism for both climate change mitigation and adaptation.

According to the revised ETS Directive adopted on 23 April 2009, member states can determine how to use the proceeds from the auction of allowances. Nevertheless, 50% of the proceeds must be used according to Article 10.3 of the revised Directive, which include funding for both mitigation and adaptation measures.

8 Decision 1/CMP.3 “Adaptation Fund”, FCCC/KP/CMP/2007/9/Add.1.

9 http://www.thegef.org/gef/adaptation (last visited: 2011/5/21).

different types of carbon finance mechanisms¹⁰) are regional financial mechanisms. Bilateral financial mechanisms often involve funding provided by one country (usually developed countries) that supports a particular types of projects or activities for climate change mitigation or adaptation undertaken by eligible country (usually developing countries). For example, the “International Climate Initiative” set up by Germany¹¹ in 2008 and the “Environmental Transformation Fund” set up by the UK¹² in 2008 are two such type of bilateral financial mechanisms. Unilateral financial mechanisms are mostly established domestically, such as the “Brazil Amazon Fund” set up by Brazil in 2008¹³ and the “Indonesia Climate Change Trust Fund”

set up by Indonesia¹⁴ in 2009.

2.3 sources of fund

The sources of funding for a financial mechanism can come from the pubic sector and the private sector.¹⁵ At the international scale, public sources can come from the traditional Overseas Development Aid (ODA), concessional debt, loan guarantee, or technology transfer arrangements. At the domestic level, funding from the public sources might include government budgets (for example, carbon tax), special levy (for example, or air pollution control fee. Funding from the private sector might include credit offsets in developed countries (for example, the EU ETS), insurance, or foreign direct investment. Currently, most of the financial mechanisms for climate change have their funding sources from the public sectors, including all of the financial mechanisms under the international climate change regime. However, some financial mechanisms have their funding sources from both the public and the private sectors, such as most of the carbon funds administered by the World Bank Group. For example, the “Prototype Carbon Fund” raises its fund from seven private companies and six governments.¹⁶

2.4 types of activities funded by financial mechanisms

Financial mechanisms for climate change can support a wide range of activities, including project lending, program or policy lending, and for investment only. Financial mechanisms for project lending refer to providing funding and/or technologies for a specific project (for example, a solar power plant). Financial mechanisms for program or policy lending support a program of action or a set of policies (for example, a set of subsidy programs to support renewable energy sector). Financial mechanisms for investment only use their fund to purchase offsets generated from emissions reduction projects, such as the certified emissions reductions (CERs) generated from the Clean Development Mechanism (CDM) projects). The CDM under the Kyoto Protocol is a typical financial mechanism for project lending. The GEF started as a financial mechanism for project lending as well. However, the GEF picked up the practices of program/policy lending

10 http://www.adb.org/Climate-Change/funds.asp (last visited: 2011/5/21)

11 http://www.bmu-klimaschutzinitiative.de/en/home_i (last visited: 2011/5/21)

12 http://www.decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/intl_strat/ietf/ietf.aspx (last visited:

2011/5/21)

13 http://www.amazonfund.org/ (last visited: 2011/5/21)

14 http://www.icctf.org/site/ (last visited: 2011/5/21)

15 Stewart, R.B., Kingsbury, B. & Rudyk, B., December 2, 200, Climate Finance: Key Concepts and Ways Forward, Harvard Project on International Climate Agreements, available from: http://belfercenter.ksg.harvard.edu/files/Stewart%20Final.pdf (last visited: 2011/5/21).

http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ENVIRONMENT/EXTCARBONFINANCE/0,,contentMDK:21630008

~menuPK:5216148~pagePK:64168445~piPK:64168309~theSitePK:4125853,00.html (last visited: 2011/5/21)

in 2008 when it began to provide “a long-term and strategic arrangement of individual yet interlinked projects that aim at achieving large-scale impacts on the global environment.”¹⁷ Some of the carbon funds administered by the World Bank Group are the type of financial mechanism for investment purposes.

3. Design elements and guiding principles of financial mechanism for climate change, with particular focus on the governance structure

Based on the definition given to financial mechanisms for climate change previously, as well as drawing from some research works in the relevant field,¹⁸ a financial mechanism for climate change should comprise the following three key elements: resource mobilization (generation), resource disbursement (delivery), and governance of institutional arrangements (administration). The guiding principles in each element will be briefly introduced as follows.

3.1 Generation: resource mobilization

This element refers to how the resources/funding of a financial mechanism are generated. As the previous section indicated, the sources of funding can derived broadly from the public and the private sectors.

According to Article 4.3 of the UNFCCC and paragraph 1(e) of the so-called Bali Action Plan adopted at the 13^th Conferences of the Parties, the following five principles are crucial for resources mobilisation: adequacy, predictability, sustainability, equity and common but differentiated responsibilities and respective capabilities, and, measurability.¹⁹

These five guiding principles are equally important when designing the method of how resources will be generated under the financial mechanism for climate change. However, depending on the time-frame, sources of funding, and objective and purpose, the importance and roles of each of these guiding principles will be different. For example, if the source of funding comes from the ODA through the governments’ annual budgets, this can satisfy the principles of measurability and predictability in that particular year when the budget is approved. But from a long-term perspective, such a source of funding might be incompatible with precisely these two principles as each government’s annual budget is hard to predict in advance. Furthermore, Article 4.3 of the UNFCCC requests the Annex II Parties to provide “new and additional” financial resources, which means that an Annex II Party cannot rely on its existing ODA to meet this financial obligation under the UNFCCC. On the other hand, when the source of funding comes from the private sector, for example, private investment, such type of funding might be more “adequate”. Nevertheless, it might also be more difficult to be “measurable” and “predictable”, as the availability of such type of funding largely depend on the

willingness and capacities of those private investors to provide the necessary resources.

3.2 Delivery: resources distribution

This element refers to how resources of the financial mechanisms are delivered. It can refer to, first, the modes of distribution: the fund can be delivered by grants, concessional loans, or investment channel (for

17 GEF, Adding Value and Promoting Higher Impact through the GEF’s Programmatic Approach, available from:

http://www.thegef.org/gef/sites/thegef.org/files/publication/Programmatic_Approach.pdf (last visited: 2011/5/21)

18 For example: Bird, N. & Brown, J., March 2009, International Climate Finance: Principles for European Support to Developing Countries; Global Canopy Programme, 2009, The Little Climate Finance Book: A guide to financing options for forests and climate change.

19 Global Canopy Programme, 2009, supra note 18, p. 31.

example, for a CDM project). Second, it can refer to the types of activities that the resources will fund:

projects or programmes/policies. Third, it can also refer to the channel through which funding reach their target recipients: whether the recipients can have direct access to the fund, or they have to apply for the use of fund via an appropriation or review mechanism. According to Article 11 of the UNFCCC, paragraph 1(e) of the Bali Action Plan and the Paris Declaration on Aid Effectiveness, the following five principles are crucial

在文檔中氣候變遷下的永續環境治理：法律與政策的因應模式-氣候變遷減緩與調適措施之財務機制(I) (頁 45-66)